[opendtv] Re: Analysis: Broadcast's $1 Billion Pot of Gold

  • From: Craig Birkmaier <craig@xxxxxxxxx>
  • To: opendtv@xxxxxxxxxxxxx
  • Date: Mon, 14 Jul 2008 23:40:53 -0400

At 10:45 AM -0400 7/14/08, John Shutt wrote:
Please see inline.

----- Original Message ----- From: "Craig Birkmaier" <craig@xxxxxxxxx>

An interesting question. The total is very significant, but much of this subscriber revenue comes from optional digital tiers that consumers can elect to subscribe to.

As opposed to the 'mandatory basic cable' that every US citizen is required to purchase? All cable is elected to be subscribed to by consumers.

Nice comeback John, but there is a huge difference here. The cable industry has spent years focused on the extended basic tier. The digital tiers did not exist until the late '90s on cable, about 1996 for DBS. Over those years people came to expect new channels from their cable systems with each facilities upgrade. There was a BIG jump in the number of channels when systems upgraded to 550 MHz; prior to that most cable systems had no more than 40 channels, some of which were scrambled premium services requiring a cable system STB. The industry is also quick to point out that the major reason for the price increases (since 1992) is directly tied to the availability of more channels in the extended basic tier.

When systems upgraded to 700 MHz (or higher) things started to change. The biggest change was the addition of digital tiers and cable modems. Many of the new digital tier channels were created by existing cablecasters like Discovery. And a large number of new regional sports channels were also created. These tiers are sold more like a premium channel, and I strongly suspect that the channels within a tier get larger subscriber fees, as the total number of subscribers is relatively small when compared to the number of subscribers to extended basic.

So in a sense, the cable industry would have us believe that the digital tiers are closer to the model of ala carte that would exist if they were forced to offer it.

I think it would be fair to say that Discovery Networks would not have created so many new channels if they could only have been included in the extended basic tier. it is also important to note that once you have a large NOC (Network Operations Center), and you are creating content to populate 4 of 5 networks, the incremental cost to launch a new network (that reuses some of the programming you are already using on other channels) is relatively small.

I can assure you that most of the mainstream Discovery channels could operate profitably without subscriber fees.

Perhaps, but I'm willing to bet not with the same number of channels offered or the same number (and quality) of original programs produced.

I agree. As I stated above, I think many of the newer Discovery Channels were created specifically to populate digital tiers for which Discovery collects larger subscriber fees. As for the quantity of original programming, I doubt it would be any different if they could not collect subscriber fees. The average cost of each episode of Discovery Network shows is not that large to begin with ( I believe it is in the range of $25,000 to $30,000 per half hour).

Why would they do something stupid like this? The NORM in the U.S. is double dipping. Only market forces could change this, and they are insulated from market forces by the actions of government that make the double dipping possible.

As I posed in my question to you, the incentive to do this to gain access to a valuable slot in the expanded basic tier. The Craig Channel wants to be in the expanded basic tier of BerTV, so they offer a channel with no subscriber fees, and Bert gets to keep more money. So Bert kicks off The John Channel, who was demanding $1.50 per sub.

Not certain where you are going with this. It is important to remember that the cable industry created this beast, charging subscriber fees for the new networks they created to compete with Broadcast Television. The reality is that the cable industry loves subscriber fees as much as the broadcasters who now want in on this gravy train. There are several reasons for this:

1. Leveraging the float: perhaps the most important economic engine for the cable industry (and DBS too) is the ability to gain leverage off of the huge cash flow that is generated. Higher average monthly revenues per subscriber translate into a larger cash float that they can invest and make more money off of. I do not have any privileged information about retrans consent agreements, but I would strongly suspect that the cable companies hold onto these fees long enough to make a few bucks off of the float.

2. Piling on: it is easy to blame the media conglomerates for each new rate increase, thanks to the publicity that surrounds the infrequent events where a channel is pulled from a system due to a squabble over subscriber fees. But each time the rates go up, the cable systems MORE THAN COVER the increased subscriber fees. This is a wonderful gimmick for all parties involved. Everyone is pointing fingers at the other guy as rates keep increasing at a pace that is significantly greater than inflation.

I'm sorry, Craig, I did not make myself sufficiently clear. A channel with no ads and a small subset of all subscribers goes for $10 per month, who knows how much of that HBO sees. A channel with ads and a universe of just about all subscribers goes for $0.10-$1.00 per month to the program provider. (I have no idea what the current per sub charges are, but it's in that range for most channels, I'm sure.)

The average is in the range you cited, with more at or below $0.50 per month than above this level. Only a handful of popular channels can charge between $0.50 and $1.00. And then there is ESPN, which averages around $2.70 per month.

Point being, HBO has a much smaller subscriber universe AND no ad revenue, which explains the high per sub cost. Expanded basic channels have a lower per sub cost because they get revenue for almost every subscriber in the system, AND they have supplemental ad revenues. Take away the number of subscribers from the equation (because of ala carte, assuming that <100% of current subscribers elect to take the channel) and in order for revenue to the program provider to remain constant, per sub fees have to do what? Go up. Therefore, ala carte is very likely to increase per sub costs, and lower any potential "savings" seen by the consumer. Exactly how much is beyond my financial projection abilities, but the trend line seems clear.

This is the line that the cable industry keep using. On the surface it makes sense. But the logic is flawed. if the subscriber fees go up to compensate for those who do not subscribe you can get into a nasty downward spiral where more and more people choose not to pay for that channel. At the same time, ad revenues will start to decline as fewer people watch that channel.

As I stated previously, many of these channels cannot afford to lose potential channel surfers who may stumble into something interesting and watch. So I believe that many of these channels would have little choice but to drop the subscriber fees so that they would not be dropped by viewers. The good news is that they might gain even more occasional viewers by dropping subscriber fees and competing for eyeballs with a smaller total number of channels coming into the home. I may be wrong, but I don't think so.

And then there is another important reality. The TV business is being challenged on multiple fronts. Revenues are not stable or growing for most of the players. Ala carte would create a more competitive playing field and this suggests that margins might need to be reduced for those who want to keep playing.

Bottom line, I don't think that most of these channels can risk raising prices for a smaller audience.

I do not buy this argument. I believe that the license fees are there to keep the BBC free of ads. In this they are more like HBO. The license fees were there before Freeview and Freview will most likely exist AFTER the UK pulls the plug on the funding of the BBV, which is now fully capable of sustaining itself via distribution to global markets.

I know we have agreed to disagree over this point in the past, and will have to continue to do so. The transmission infrastructure was originally built out by the Beeb, then ITV and others coattailed onto that infrastructure at a later date. The switch to digital has just perpetuated that practice. It is the model that you base your transmission utility proposal on. Beeb is the number one user of the transmission system, and a guaranteed tennant. Because of that, other tennants can be offered a lower rate than if they had to site, build, and maintain their own transmission network, as is the case here in the US.

I'd like to know more about this. I though most of the license fee was to pay for content not infrastructure. The BBC did not build the infrastructure; that responsibility was given to a third party that gets payments from the BBC, and the commercial channels. Obviously one could conclude that some of the license fee is used by the BBC to pay for the use of the transmission infrastructure. Anyone with more detailed info on who pays for what is encouraged to contribute to this discussion.

If the Beeb went out of business tomorrow, and all TV Licensing fees ended, do you think that the rest of those Freeview channels and the Freeview transmission network would survive in its current form?



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